• No results found

What is an Employee Stock Ownership Plan (ESOP)?


Academic year: 2021

Share "What is an Employee Stock Ownership Plan (ESOP)?"


Loading.... (view fulltext now)

Full text


What is an Employee Stock Ownership Plan (ESOP)?

An ESOP is a Tax “Qualified”, Defined Contribution Plan, governed by the Internal Revenue Service and Department of Labor that was put into law under the Employee Retirement Income Security Act (ERISA) of 1974. More specific an Employee Stock Ownership Plan (ESOP) is:

 A plan that offers shareholder liquidity.

 A plan that offers succession planning.

 A plan that offers financial and equity incentives to employees using tax-deductible dollars from the Company.

 A plan that enables a Company to reduce or eliminate corporate taxes.

 A plan designed by law to invest primarily in the stock of the sponsoring company.

 A plan that is “qualified” by the IRS, which means the company and selling shareholder receive tax benefits not available to other NON ESOP companies or selling shareholders.

 A plan that is able to increase working cash flow or restructure debt (dilution).

Why an ESOP?

An ESOP allows shareholders to monetize their equity as part of a succession plan in a tax efficient manner – no other retirement plan can deduct the principal portion of a stock buyout. While monetizing their equity, owners create a perpetual Company where continuing and new employees will be able to share in the equity growth of the Company. An ESOP is one tool but other shareholder exit strategies include:

 Sale to Third Party

 Sale to Management

 Roll up / Private Equity

 Initial Public Offering

 Wind-Up Business and Liquidate

 No plan - Die with a lot of life insurance


Company Benefits:

 Income tax savings of 40% to 100%

 Able to increase cash flows (dilution)

 Corporation can succeed through multiple generations

 Able to use pre-tax dollars to repay debt associated with ESOP

 S Corporation stock owned by an ESOP is not subject to federal tax

 Tax-deductible C Corporation dividends

Shareholder Benefits:

 Able to monetize equity and create liquidity for ownership

 Value received for stock is at fair market value (must be independent value)

 Able to retain control of Company

 As a C Corp, able to rollover sale proceeds, tax deferred (1042)

Advantages for Employees:

 Employees participate in ESOP as a retirement plan, sharing in equity growth of the Company

 Accounts are tax free until a distributable event

 Incentivizes/Retains employees beyond a paycheck

 ESOP contributions are made solely by the Company

 ESOP contributions are typically larger than other retirement plan contributions


Typical ESOP set ups:

 Cash fund for (x) years to build up down payment or “war chest” for future sale

 Corporation obtains bank loan to purchase stock from owner(s)

 Owner carries note

 Any combination of above

Myths & Misconceptions:

 Owner must disclose all financial information to employees = FALSE

 Owner will lose control of Company if ESOP owns more than 50% = FALSE

 Owner must sell stock immediately upon plan creation = FALSE

 ESOPs are only for large companies = FALSE

ESOP Facts:

 Approximately 6,000 ESOPs in U.S.

 4,500 majority owned by the ESOP

 3,000 are 100% owned by the ESOP

 An overwhelming majority of ESOP companies have other retirement and/or savings plans, such as defined benefit pension plans or 401(k) plans, to supplement their ESOP

 Found in all industries, not limited to a particular type of business

 71% of ESOP’s are in companies with fewer than 250 employees

 At least 75% of ESOP’s are or were leveraged, i.e. they used borrowed funds to acquire stock bought by the ESOP from a bank or owner carried paper

 ESOPs can be as small as 25 employees, no limit as to how large


Typical Installation of an ESOP

1. Education and information A. Preliminary Meeting(s):

1. Review Company/Board and Shareholder objectives 2. Discuss valuation procedures in ESOP context 3. Discuss ESOP “culture” and sale scenarios

a. corporate governance b. ESOP trustee(s)

4. Go over ESOP rules and long term planning

a. contributions, forfeitures, distributions, leveraging b. on-going record keeping and valuation

c. distribution obligations in future d. impact of employees on value B. Secondary Meeting(s) – as necessary

1. Review first meeting

2. Meet with other Company advisors to address questions/concerns

2. Installation

A. Independent Appraisal of Company for Transaction

B. Take Plan Specs / Draft Plan Document / Draft Transaction Documents C. Review Plan / Transaction Documents, Sign, Submit to IRS

D. Communicate to Employees

E. Typically takes 3-6 months to install the ESOP

F. Installation fees range from $30,000 - $100,000+ depending on complexity

**Steps may be completed in different order**


owners / advisors to understand and analyze their succession objectives. The approach is simple; educate the shareholders & board of directors so that they can make an informed decision on whether or not an ESOP is right for them. With Trivium Analytics educating shareholders and board members, an ESOP can be properly designed to best meet their objectives.

Trivium Analytics has worked with and continues to work with many privately held businesses throughout the United States. We are quite confident our clients will recommend our work and are happy to provide customer references. Thank you for considering Trivium Analytics for your ESOP installation needs.


Todd Henry President

Trivium Analytics, Inc. 4713 1st Street, Suite 255

Pleasanton, CA 94566 Phone: 925-523-3398

Fax: 925-369-0496 thenry@triviumanalytics.com


Related documents

2459 (2014), the United States Supreme Court rejected the "Moench presumption" that ESOP Fiduciaries are entitled to a presumption of prudence with respect to investments

As the employer sponsoring an ESOP for your employees, your contributions to the plan (whether in the form of company stock, or cash that is used to purchase company stock)

™ Company stock is held on behalf of employees/participants in ESOP trust.. • ESOP trust is

An Employee Stock Ownership Plan is a qualified retirement plan much like a Profit Sharing Plan or 401(k), the main difference is that within an ESOP the primary investment is

A company can make tax-deductible cash contributions to the ESOP to buy out an owner’s share, or have the ESOP borrow money to buy the shares. After the ESOP owns at least 30%

Using an Employee Stock Ownership Plan (ESOP) for Business Continuity in a Closely Held Company One of the most difficult problems for owners of closely held businesses is finding

„ Company could convert to S corp status after stock has been acquired by the

● Investment of plan assets: Plan assets are required to be invested in employer stock with some exceptions for those participants nearing retirement.. In addition, assets may be